The Japanese Spring

Peter Tasker

Peter Tasker

A heartening trend has emerged in Japan and hardly anyone seems to have noticed. The number of suicides has been falling rapidly year after year and now stands 30% below its peak. The appalling increase between 1998 and 2003, when suicides soared from 24,400 per year to 34,400, has now been largely reversed.

Of course there is still plenty to get depressed about, if you are so inclined. But clearly fewer people are so inclined. A key reason is the economic background.

Conditions today are the polar opposite of the dark days of the late 1990s when the Japanese banking system collapsed, the entire corporate sector slumped into the red and the lifetime employment system crumbled as companies shifted production off-shore. Now bankruptcies are at a twenty four year low, corporate profits at an all-time high and conditions ripe for bringing production back home.

Most important of all for psychological well-being and social tranquility, the Japanese economy is running at full employment. With the job-offer-to-applicant ratio at 1.15, theoretically there is a job for anyone who wants one. Even without any pressure from the Abe administration, such tightness in the labour market will naturally shift bargaining power away from employers to workers.

This year’s shunto wage settlement at large companies was the highest since 2001, with 80% of companies accepting the unions’ demands. Even Japan’s “precariat” of part-time workers are doing better too, with hourly wages up 1.1% according to research by Recruit Jobs. This month, the year-on-year rate of consumer price inflation will drop to around zero, so the entire Japanese workforce will be experiencing higher real wages. Furthermore, the structural shortage of new entrants to the workforce suggests that the increase in full-time jobs will soon exceed the increase in part-time jobs for the first time since 1995.

In today’s world this is a near-miraculous state of affairs. The US economic recovery is in its fifth year but the labour participation ratio still languishes near 35 year lows. The Eurozone has an eighteen million strong “reserve army of the unemployed”, to use Karl Marx’s term, with the youth unemployment rate a catastrophic 50% in the ravaged countries of the south. Even the UK, where growth has been strong, has an unemployment rate of over 5% and the largest peacetime external deficit (as a % of GDP) since the 1830s.

Japan’s labour market is tight and will tighten further because of the limited supply. Overall GDP growth can be pumped up by mass immigration, but that simply defers demographic problems rather than solving them – and at a cost to social cohesion that becomes all too apparent at times of economic fragility and ethnic tensions.

Instead Japan has chosen to confront the reality of societal ageing full-on, rather than rely on the economic equivalent of steroids to boost performance. Over time the result will be greater job quality and more opportunities for women and the elderly to make a contribution. An added benefit is that Japan retains control over its own borders – which in today’s chaotic world is no small matter.

THE INEQUALITY MYTH

The Japanese are very lucky – but they don’t appear to think so. Opinion polls consistently show that the majority of the public remains dubious about the benefits of Abenomics and commentary in the domestic and overseas media is mostly critical.

This scepticism is partly the effect of Prime Minister Abe’s one serious policy error, which was to raise the consumption tax last April, leading to a severe, albeit temporary fall in real incomes. He should have known better than to believe the fiscals hawks when they promised that the economy would absorb the blow with little effect. Then-Prime Minister Hashimoto made the same mistake in 1997 and the result was the destruction of his premiership, the political wilderness and an early grave.

A more important factor behind the negativity is the cumulative psychological effect of Japan’s long multi-decade malaise, in which optimists were proved wrong time and again. Unsurprisingly after such a traumatic experience, pessimists sound wise and far-sighted, whereas optimists sound shallow and naïve. The default response is to align yourself with the risk-averse majority, which is why companies have continue to hoard cash rather than investing in new facilities and demand for bank loans remains subdued.

Altering the psychological weather is one of the jobs of monetary policy. Half-measures will not do, as Bank of Japan Governor Kuroda fully appreciates. Just two years ago he fired the “big bazooka” of quantitative and qualitative easing. The effect on the financial markets has been startling. Bond yields have evaporated. The yen has fallen to the most competitive level since the early 1970s. The stock market has doubled. In other words, the world has turned upside down and being cautious no longer looks so smart.

The strengthening of Japan’s national balance sheet has been dramatic. Add together the increase in stock market values, the increase in real estate values and the increase in the yen value of Japan’s huge treasure trove of overseas financial assets. The total value of the addition to Japan’s “shareholders’ equity” exceeds 100% of GDP. Change on such a scale is certain to have powerful effects on the real economy.

What about the effect on inequality? Quantitative easing has proved controversial in many countries because the boost to asset values appears to increase the gap between the haves and the have-nots. Some Japanese tabloids are hyper-ventilating about the small handful of internet entrepreneurs who have seen their personal wealth soar in the Abe bull market, but the pathology of inequality in Japan is quite different from the experience in the US and elsewhere.

Japan’s problem is not asset inequality, which is much lower than in the supposedly egalitarian Scandinavian countries. A twenty two year bear market in stocks and real estate is a great leveller. The concern in Japan is the widening of income inequality that took place over the same period that asset inequality was flattening.

In the US, the highest earners have seen huge increases in recent years, while ordinary people have seen negligible income growth. In Japan, the highest earners have experienced negligible growth while the lowest earners have seen substantial declines. In essence, Japanese inequality is a by-product of the long years of deflationary stagnation, when the most obvious areas of growth were one hundred yen shops, part-time workers and stay-at-home hikikomori males. This trend too should soon start to reverse, as the labour market turns from a buyer’s market to a seller’s market and companies realise they must invest more in human capital.

What of the bubble risk that critics of QQE like to grouse about? Again, in Japan’s case that is hardly significant since the asset markets are merely recovering from a severe “inverse bubble.” Real estate and stock prices are no higher than they were 28 years ago. Valuations in relation to corporate earnings and rents are inexpensive on a global and historical comparisons.

Some increases in asset inequality and market volatility would be a small price to pay for reversing the dynamic of the past twenty years and getting the gigantic hikikomori known as the Japanese economy to come out of its room.

NO GOING BACK

Many of today’s encouraging trends – including the tightening of the labour market, the rise in corporate profitability and, indeed, the decline in suicides – were visible before Abenomics was invented. What Prime Minister Abe has achieved is to establish a macro-economic framework that encourages these trends to strengthen, rather than being prematurely snuffed out. Additionally his personal style of quiet confidence, echoed by BoJ Governor Kuroda, make a powerful contrast to the dithering and half-hearted fatalism of their predecessors. Together they have charted a clear path from which there can be no going back.

In the “new normal” world that has taken shape since 2008, Mr. Abe is one of the few conservative leaders to reject the politics of austerity and deflation and embrace reflation. It is hard to imagine any US Republican president seeking advice from the liberal economist Paul Krugman, as Mr. Abe did prior to postponing the second consumption tax hike last November. Cajoling companies into granting workers wage hikes was also a ground-breaking move – though ever-pragmatic British Prime Minister David Cameron has recently followed suit.

Mr. Abe’s convincing electoral victories and continuing high approval ratings suggest that the public has more faith in his approach than it is willing to admit to pollsters. The stock market seems convinced too. Over the coming months evidence will mount that economic recovery is back on track. After two lost decades, Japan is in the process of finding itself again.